Total return opportunities in emerging markets today

Emerging markets (EMs) are often viewed primarily as a source of long-term growth. While this remains true, it overlooks an important part of the return profile: income.

Over time, EMs have evolved into a more balanced asset class, where dividends play a significant role alongside capital appreciation.

A shift in dividend culture

One of the clearest structural changes in emerging markets is the rise in dividend-paying companies.

More than 90% of companies in the MSCI Emerging Markets Index now pay a dividend (Chart 1) – higher than in developed markets (DMs). This marks a meaningful shift over the past two decades, supported by stronger cash flows and more disciplined capital allocation.

Income as a key driver of returns

Dividends have contributed significantly to long-term returns in EMs (Chart 2).

Over extended periods, income has accounted for roughly half of total returns, which have had several implications:

Importantly, dividend growth in EMs has outpaced many DMs over time (Chart 3), reflecting improving corporate fundamentals.

Strong corporate fundamentals

The income story is supported by a solid corporate backdrop. Emerging market companies generally exhibit:

In our view, these characteristics suggest that companies have the capacity to maintain or gradually increase shareholder distributions over time.

A measured outlook for payouts

Dividend growth is likely to be gradual rather than dramatic. Many companies prioritize reinvestment, particularly in faster-growing economies.

That said, there are signs of improving capital allocation. In Korea, governance reforms are encouraging greater focus on shareholder returns.¹ In China, certain state-owned enterprises have increased dividend payouts, attracting investor interest in more stable income streams.²

We believe these developments point to a steady evolution rather than a sudden shift.

Portfolios, underrepresented

Despite their scale, emerging markets remain underrepresented in many portfolios.

The imbalance becomes clear when viewed across three dimensions. Emerging markets account for a significant share of global economic output, reflecting their growing role in global activity (Chart 4).

They also represent a large portion of listed companies worldwide, underscoring the breadth and depth of the opportunity set (Chart 5).

However, this presence is not fully reflected in global equity markets. Emerging markets make up a meaningfully smaller share of total market capitalization, suggesting that investor allocations have not kept pace with their economic and corporate significance (Chart 6).

We believe this gap highlights a structural disconnect. While EMs are increasingly central to global growth and production, they continue to occupy a more limited position in many portfolios.

A total return framework

We believe a total return perspective provides a more complete way to assess EMs, which combines:

This dual contribution can be particularly valuable in a more balanced and uncertain market environment.

A broader investment landscape

Viewing EMs through a total return lens also highlights the range of opportunities across the asset class, including:

In each case, attention to cash flow and capital allocation remains key.